ACW2491 Financial Accounting

Tutorial Solution
Semester 2 2018
Topic 5: Property, Plant and Equipment- Revaluation

REVIEW QUESTIONS
1. What assets constitute property, plant and equipment?
Para 6 of AASB 116/ IAS 16 defines PPE as follows:
Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
(b) are expected to be used during more than one period.

2. What are the recognition criteria for property, plant and equipment?
Para 7 of AASB 116/ IAS 16 contains the following recognition criteria:
The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:
(a) it is probable that future economic benefits associated with the item will flow to the entity; and
(b) the cost of the item can be measured reliably.

10. How does an entity choose between depreciation methods, for example, straight-line versus reducing-
balance models?
Para 60 of AASB 116/ IAS 16 states:
The depreciation method used shall reflect the pattern in which the asset's future economic benefits are
expected to be consumed by the entity.
Choice is based on which method best reflects the pattern of benefits expected to be consumed by a specific
asset given its use in a specific entity.

12. Under the revaluation model, how is a revaluation increase accounted for?
Para 39 of AASB 116/ IAS 16 states:
If an asset's carrying amount is increased as a result of a revaluation, the increase shall be recognized in
other comprehensive income and accumulated equity under the heading of revaluation surplus. However,
the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of
the same asset previously recognised in profit or loss.

13. Under the revaluation model, how is a revaluation decrease accounted for?
Para 40 of AASB 116 / IAS 16states:
If an asset's carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in
profit or loss. However, the decrease shall be recognized in other comprehensive income to the extent of
any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognized in
other comprehensive income reduces the amount accumulated in equity under the heading of
revaluation surplus.

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 ACW2491 Financial Accounting
Tutorial Solution
Semester 2 2018
Topic 5: Property, Plant and Equipment- Revaluation

PRACTICE QUESTION
Question 9.2 Application of revaluation model
At 1 July 2014, Twister Ltd acquired the following non-current assets:

Equipment $100 000
Vehicles    80 000

They are in different classes of non-current assets and are to be measured at fair value. The expected useful lives
of vehicles and equipment are 5 years and 10 years, respectively.
At 30 June 2015, the fair values of both assets were assessed. The equipment had a fair value of $82  000, and
the vehicles, $70 000. The remaining useful lives were assessed to be 8 years for equipment and 7 years for
vehicles.
At 30 June 2016, the fair value of equipment was assessed to be $81  750 and the fair value of vehicles was
$55 000.

Required
Prepare the journal entries for Twister Ltd for the years ending 30 June 2015 and 2016.

Twister Ltd
General Journal
30 June 2015
Depreciation expense – equipment Dr 10 000
Accumulated depreciation – equipment Cr 10 000
(Depreciation charge for the period– $100 000 / 10 years)

Accumulated depreciation - equipment Dr 10 000

Equipment Cr 10 000
(Write down of equipment to carrying amount: $90 000/ close acc depreciation)

Expense- write-down of equipment Dr 8 000

Equipment Cr 8 000
(Revaluation downwards from carrying amount to fair value: $90 000 to $82 000)
--------------------------------------------------------------------------------
Depreciation expense – vehicles Dr 16 000
Accumulated depreciation – vehicles Cr 16 000
(Depreciation charge for the period – 20% x $80 000)

Accumulated depreciation – vehicles Dr 16 000

Vehicles Cr 16 000
(Close accumulated depreciation)

Vehicles Dr 6 000
Gain on revaluation of vehicles (OCI) Cr 6 000
(Revaluation increment: $64 000 to $70 000)

Income tax expense (OCI) Dr 1 800

Deferred tax liability Cr 1 800
(Tax effect of revaluation increment)

Gain on revaluation of vehicles (OCI) Dr 6 000

Income tax expense (OCI) Cr 1 800

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 ACW2491 Financial Accounting
Tutorial Solution
Semester 2 2018
Topic 5: Property, Plant and Equipment- Revaluation

Asset revaluation surplus - vehicles Cr 4 200

(Accumulation of net revaluation gain in equity)

30 June 2016
Depreciation Expense – Equipment Dr 10 250
Accumulated depreciation – Equipment Cr 10 250
(Depreciation for the period– $82 000 / 8years)

Accumulated depreciation - Equipment Dr 10 250

Equipment Cr 10 250
(Close acc depreciation)

Equipment Dr 10 000
Gain on revaluation of equipment (P/L) Cr 8 000
Gain on revaluation of equipment (OCI) Cr 2 000
(Revaluation of equipment from $71 750 to $81 750, with prior revaluation write-down of $8 000)

Income tax expense (OCI) Dr 600

Deferred tax liability Cr 600
(Tax effect of revaluation gain)

Gain on revaluation of equipment (OCI) Dr 2 000

Income tax expense (OCI) Cr 600
Asset revaluation surplus Cr 1 400
(Accumulation of revaluation gain in equity)
---------------------------------------------------------------------------
Depreciation expense – vehicles Dr 10 000
Accumulated Depreciation – vehicles Cr 10 000
(Depreciation charge for the period – $70 000 / 7 years)

Accumulated depreciation – vehicles Dr 10 000

Vehicles Cr 10 000
(Close acc depreciation)

Loss on revaluation of vehicles (OCI) Dr 5 000

Vehicles Cr 5 000
(Revalue downwards: $60 000 to $55 000)

Deferred tax liability Dr 1 500

Income tax expense (OCI) Cr 1 500
(Tax effect of write down to fair value)

Asset revaluation surplus Dr 3 500

Income tax expense (OCI) Dr 1 500
Loss on revaluation of vehicles (OCI) Cr 5 000
(Reduction in accumulated equity due to revaluation decrement on vehicles)

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 ACW2491 Financial Accounting
Tutorial Solution
Semester 2 2018
Topic 5: Property, Plant and Equipment- Revaluation

Question 9.6 Acquisition of assets, depreciation and change to revaluation model

Robert Niro commenced operations on 30 March 2012 in the rubbish and recycling industry, trading as Midnight
Run Services Ltd. The end of the reporting period is 31 December, and the company depreciates all depreciable
assets using the straight-line method.
The following events occurred during 2015 and 2016:
2015
April 0 Paid $140 000 cash for a second-hand truck (Truck A). Robert estimated the truck’s
1 useful life and residual value at 5 years and $20 000.
Paid $1500 cash to recondition Truck A’s engine.
June 3 Paid $32 000 cash for equipment. Robert estimated the equipment’s useful life and
0 residual value at 10 years and $1500.
Aug. 3 Paid $600 cash for Truck A’s transmission repairs and oil change.
1
Dec. 3 Recorded depreciation on Truck A and equipment.
1

2016
March 1 Paid $290 cash to replace a damaged bumper bar on Truck A.
3
Aug. 0 Traded in Truck A for a new truck (Truck B) that cost $240 000. The dealer granted a
1 trade-in allowance of $90 000 on the Truck A, and the balance was paid in cash. Robert
estimated Truck B’s useful life and residual value at 7 years and $30 000.
Dec. 3 Recorded depreciation on Truck B and the equipment. Robert decided to change the
1 basis of measuring equipment to the revaluation model. He assessed the equipment’s
fair value at 31 December 2016 at $29 000.
Required
Prepare general journal entries to record the above events.

MIDNIGHT RUN SERVICES

01/04/15
Truck A Dr 140 000
Cash Cr 140 000
(Acquisition of Truck A)

Truck A Dr 1 500
Cash Cr 1 500
(Reconditioning of Truck A’s engine)

30/06/15
Equipment Dr 32 000
Cash Cr 32 000
(Purchase of equipment)

31/08/15
Repairs & maintenance expense Dr 600
Cash Cr 600
(Repairs and maintenance on Truck A)

31/12/15
Depreciation – Truck A Dr 18 225
Accumulated depreciation – Truck A Cr 18 225

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 ACW2491 Financial Accounting
Tutorial Solution
Semester 2 2018
Topic 5: Property, Plant and Equipment- Revaluation

(Depreciation charge of Truck A: 9/12 x 1/5[141 500 – 20 000)

Depreciation – equipment Dr 1 525

Accumulated depreciation – equipment Cr 1 525
(Depreciation of equipment:6/12 x 1/10[32 000 – 1 500)

13/03/16
Repairs & maintenance expense Dr 290
Cash Cr 290
(Payment for repairs and maintenance)

01/08/16
Depreciation – Truck A Dr 14 175
Accumulated depreciation – Truck A Cr 14 175
(Depreciation charge for year to date of sale:7/12 x 1/5[141 500 – 20000])

01/08/16
Accumulated depreciation – Truck A (18 225 + 14 175)Dr 32 400
Carrying amount on sale – Truck A Dr 109 100
Truck A Cr 141 500
(Sale of Truck A and derecognition)

01/08/16
Truck B Dr 240 000
Proceeds on sale of Truck A Cr 90 000
Cash Cr 150 000
(Acquisition of Truck B and trade-in of Truck A)

31/12/16
Depreciation – Truck B Dr 12 500
Accumulated depreciation – Truck B Cr 12,500
(Depreciation of Truck B: 5/12 x 1/7[240 000 – 30 000])

Depreciation – equipment Dr 3 050

Accumulated depreciation – equipment Cr 3 050
(Depreciation of equipment:1/10[32 000 – 1 500)

31/12/16
Accumulated depreciation – eq(1525+ 3050) Dr 4 575
Equipment Cr 4 575
(Close acc depreciation))
Equipment Dr 1 575
Gain on revaluation of equipment (OCI) Cr 1 575
(Recognition of revaluation increment:27 425 to 29 000)

Income tax expense (OCI) Dr 473

Deferred tax liability Cr 473
(Tax-effect of revaluation of equipment: 30% x 1575)

Gain on revaluation of equipment (OCI) Dr 1 575

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 ACW2491 Financial Accounting
Tutorial Solution
Semester 2 2018
Topic 5: Property, Plant and Equipment- Revaluation

Income tax expense (OCI) Cr 473

Asset revaluation surplus Cr 1 102
(Accumulation of revaluation surplus in equity)
Question 9.11* Revaluation of assets
On 1 July 2016, Kingdom Ltd acquired two assets within the same class of plant and equipment. Information on
these assets is as follows:

Cost Expected useful life

Machine A $100 000 5 years
Machine B 60 000 3 years

The machines are expected to generate benefits evenly over their useful lives. The class of plant and equipment
is measured using fair value.
At 30 June 2017, information about the assets is as follows:

Fair value Expected useful life

Machine A $84 000 4 years
Machine B 38 000 2 years

On 1 January 2018, Machine B was sold for $29 000 cash. On the same day, Kingdom Ltd acquired Machine C
for $80 000 cash. Machine C has an expected useful life of 4 years. Kingdom Ltd also made a bonus issue of
10 000 shares at $1 per share, using $8000 from the general reserve and $2000 from the asset revaluation
surplus created as a result of measuring Machine A at fair value.
At 30 June 2018, information on the machines is as follows:

Fair value Expected useful life

Machine A $61 000 3 years
Machine C 68 500 1.5 years

The income tax rate is 30%.

Required
Prepare the journal entries in the records of Kingdom Ltd to record the described events over the period 1 July
2016 to 30 June 2018, assuming the ends of the reporting periods are 30 June 2017 and 30 June 2018.

1 July 2016
Machine A Dr 100 000
Machine B Dr 60 000
Cash Cr 160 000
(Purchase of Machine A and Machine B)

30 June 2017
Depreciation expense – Machine A Dr 20 000
Accumulated depreciation Cr 20 000
(Depreciation charge of Machine A- 1/5 x $100 000)

Depreciation expense – Machine B Dr 20 000

Accumulated depreciation Cr 20 000
(Depreciation charge of machine B-1/3 x $60 000)

Accumulated depreciation- Machine A Dr 20 000

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 ACW2491 Financial Accounting
Tutorial Solution
Semester 2 2018
Topic 5: Property, Plant and Equipment- Revaluation

Machine A Cr 20 000
(Close acc depreciation of Machine A)

Machine A Dr 4 000
Gain on revaluation of Machine A (OCI) Cr 4 000
(Revaluation increment: $80 000 to $84 000)

Income tax expense (OCI) Dr 1 200

Deferred tax liability Cr 1 200
(Tax effect of revaluation increment)

Gain on revaluation of Machine A (OCI) Dr 4 000

Income tax expense (OCI) Cr 1 200
Asset revaluation surplus – Machine A Cr 2 800
(Accumulation of net revaluation gain in equity))
------------------------------------------------------------------------------
Accumulated depreciation – Machine B Dr 20 000
Machine B Cr 20 000
(Close acc depreciation of Machine B)

Expense – revaluation decrement (P&L) Dr 2 000

Machine B Cr 2 000
(Revaluation downwards to fair value at 30/6/17)

1 January 2018
Machine C Dr 80 000
Cash Cr 80 000
(Acquisition of Machine C)

Depreciation expense – Machine B Dr 9 500

Accumulated depreciation Cr 9 500
(Depreciation charge of Machine B-($38 000 / 2years) x 1/2 year depn)

Cash Dr 29 000
Proceeds on sale of Machine B Cr 29 000
(Sale of Machine B)

Carrying amount of Machine B Sold Dr 28 500

Accumulated depreciation Dr 9 500
Machine B Cr 38 000
(Sale of Machine B and derecognition)

General reserve Dr 8 000

Asset revaluation surplus – Machine A Dr 2 000
Share Capital Cr 10 000
(Bonus issue from general reserve and Asset revaluation surplus)

30 June 2018
Depreciation expense – Machine A Dr 21 000
Accumulated depreciation Cr 21 000
(Depreciation charge for Machine A-1/4 x $84 000)

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 ACW2491 Financial Accounting
Tutorial Solution
Semester 2 2018
Topic 5: Property, Plant and Equipment- Revaluation

Depreciation expense – Machine C Dr 10 000

Accumulated depreciation Cr 10 000
(Depreciation charge for Machine C-1/4 x ½ x $80 000)

Accumulated depreciation – Machine A Dr 21 000

Machine A Cr 21 000
(Close acc depreciation of Machine A)

Loss on revaluation of Machine A (OCI) Dr 2 000

Machine A Cr 2 000
(Revaluation downwards of Machine A- $63000 to $61000)

Deferred tax liability Dr 600

Income tax expense (OCI) Cr 600
(Tax-effect on downward revaluation subsequent to upward revaluation)

*Asset revaluation surplus – Machine A Dr 800

Income tax expense (OCI) Dr 600
Loss on revaluation of Machine A(P&L) Dr 600
Loss on revaluation of Machine A (OCI) Cr 2 000
(Accumulation of revaluation loss to equity)

*Note: in the previous year the value of the ARS account from a revaluation increment for Machine A was $2 800.
However, the entity used $2 000 of this surplus for a bonus share issue, leaving $800 balance in this account.
Therefore, when recognising a revaluation decrement for Machine A the ARS account can only be reduced by the
$800 remaining. The balance of the loss on revaluation must now be recognised directly in P&L.

Accumulated depreciation – Machine C Dr 10 000

Machine C Cr 10 000
(Writing down to carrying amount)
Loss on revaluation (P&L) Dr 1 500
Machine C Cr 1 500
(Revaluation to fair value at 30/6/18)